Opinion: Why Newton's law applies to telecommunications

Memories of my school days are a bit hazy and admittedly more convenient than accurate. One memory that does stand out is Sir Isaac Newton’s Third Law of Motion. You will probably remember it as something like; “For every action there is an equal and opposite reaction”.

I learnt this from an exceptionally good science teacher. He did not just explain it, but went on to say that a really important bit at the end was missing. If he was Newton, the Third Law of Motion would be, “For every action there is an equal and opposite reaction and acts on different bodies.”

What he was getting at was that action by one body leads to a reaction in another body, not the same one, as otherwise the equal and opposite forces would simply cancel themselves out.

Funnily enough, the extended bit of this Third Law of Motion applies to my thinking about telecommunications regulatory policy. Specifically, which government body should have oversight of the prices charged by the Local Fibre Companies being created to implement the Government’s $1.3 billion investment in Ultra Fast Broadband.

Minister of Communications and Information Technology Steven Joyce says it will be Crown Fibre Holdings, the government arm that has been set up to negotiate with potential partners and manage the Government’s investment, using 10-year contracts. Others, including InternetNZ, want the more usual situation of oversight lying with another government arm, the Commerce Commission.

After all, that is the exact reason for its existence. On the Commission’s website, its purpose is stated as; “Achieving the best possible outcomes in competitive and regulated markets for the long-term benefit of New Zealanders.” These “best possible outcomes” include consideration of both the investors and consumers viewpoints. As an independent and specialised regulatory body, the Commission has the experience, skills and resources to get the critical component of pricing to reflect that balance.

Minister Joyce has been reported as saying the debate on which government arm and regulatory instrument is “a little bit silly”.

I think it is anything but.

The debate is actually quite narrow. The question is not if prices should be regulated, but by whom and how. So, there is no need to talk about investor certainty versus consumer equity in monopolistic situations or why reduction of risks is good for both investors and consumers. The debate is about whether the government arm in charge of investment should also be the arm in charge of oversight. The usual answer, and the correct one, is simply “no”.

Applying the extended bit of the Third Law of Motion, by having investor forces act in the same body as regulatory, we get pseudo-regulation where consumer perspectives get overwhelmed by the government’s investor perspective.

The stakes are too high to not take the issues seriously. This is about the first 10 years of pricing fibre-based internet access. And 10 years is a long time, especially so in the rapidly evolving technology world. It is also the time when New Zealanders decide if and when they get connected to this new infrastructure at home and at work.

The experience of people moving from dial-up to broadband has demonstrated that actual and relative prices for fibre-based services will have to be right. Actual, because we only have so much in our monthly budget to meet competing needs. Relative, because the perceived value of ultra fast broadband has to be significantly greater than competing broadband offers.

Currently, for many of the reasons already outlined, the Telecommunications Act calls for an independent regulator with the Commerce Commission fulfilling that role. Excluding prices on the new network for 10 years and having Crown Fibre Holdings act as both investor and “regulator” of prices sets up a conflict of interest.

There are resulting risks of sub-optimal pricing decisions; lack of public scrutiny and inputs; subverting competition (perhaps unknowingly); and favouring short-term build-out targets over long-term user benefits. There may also be the incongruous situation of different regulators for internet access depending upon whether it is over copper or fibre, at a time when both industry and consumers are in transition.

Is this a sign that we have lost faith in the checks and balances that are critical to good governance?

The Government’s intention is to reduce price uncertainty and commercial risks to protect its investment and that of its partners in the Local Fibre Companies. It is doing so at the cost of increasing the risks for consumer equity, fibre uptake, and good governance. This also postpones “normal” regulatory oversight, potentially adding to uncertainty rather than reducing or eliminating it altogether. There is, apparently, a possibility that a future Labour Government will review the regulatory exclusion. All of this to reverse a framework that has provided New Zealanders with better and cheaper broadband in the last few years than would otherwise have been the case.

Using a 10-year contract as a regulatory instrument in the technology world is fraught with danger. It is difficult to think of one that has succeeded. Building in inflation adjustments and mutual agreement as the keys to price changes may also lock in ever-increasing prices (even as technology prices drop globally) and lead to conflicts with the chosen partners in the future.

Australia has a “normal” situation. Oversight of the National Broadband Network will be with the Australian Competition and Consumer Commission. The Government there has given the Commission a A$24 million budget boost to manage the new issues and complexities that will come from the National Broadband Network rollout. The European Union, after an extensive look at other options, has decided to stay with the “normal” regulatory path.

Given that local investors and the Government are likely to only partially meet their objectives of reducing price uncertainty and commercial risks at best, a re-think on deviating from the regulatory norm will be in everyone’s interest. Before it is too late.

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